The law calls for internet retailers with more than $1 million in annual revenue to collect sales taxes from out of state shoppers. State governments claim it will help them collect billions in unpaid revenue while brick-and-mortar retailers, who also support it, say it will level the playing field by forcing online competitors to collect tax.

Opponents of the law, which include libertarians and states like Oregon that have no sales tax, complain it will lead to regulatory burdens tied to collecting tax from numerous state and local governments. Supporters counter that the task will not be that onerous because the law would require states to provide merchants with free tax collection software.

For consumers, the law means paying more sales tax on online purchases. Right now, consumers typically pay only if the online merchant is located in their home state.

The bill will now go to the House where conservatives say they will oppose the bill; they may not succeed, however, as politicians from both parties have argued that the bill does not impose a new tax but instead helps collect taxes that are already owed. The Obama Administration supports the proposed law.

eBay, one of the law’s prime opponents, said in a statement that it will keep pushing for merchants who collect less than $10 million to be exempt.

To understand more about the law, see GigaOM’s primer on who’s for it and who’s against.

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After Amazon.com’s public policy director Andrew Cecil put in an especially inept attempt in which he angered committee members by not being able to answer most questions about his company’s tax policies and procedures — the British people have become quite irate of late amid widespread reports about tax avoidance by U.S. companies — Google’s central and northern Europe VP Matt Brittin put on a better show. But his central argument is left open to question.

Brittin said Google pays a legal proportion of tax but one which some observers consider a low amount because:

“We pay corporation tax here on the activity our people do. All the innovation stuff comes out of California.”

That flummoxed committee chair Margaret Hodge and fellow committee member Amyas Morse, the National Audit Office’s comptroller, who tried to focus on money that Google U.K. sales staff earn in the U.K., regardless of where their tools were built. “The income is not generated in California, is it?,” Morse said.

What’s more, Brittin’s argument was not necessarily wholly accurate.

Few would question that the majority of Google’s magic is made in Mountain View. But, one year ago, Google made a song and dance about a new London engineering center it said was contributing to influential products including AdSense, Maps, Local, Chrome, Android and speech recognition.

At the opening of the lavishly-designed engineering floor at Google’s Victoria, London, UK headquarters, which was home to 350 engineers, VP for Europe and emerging markets engineering Nelson Mattos said:

“It was the London office that spearheaded Google’s entry to the mobile space. Products like AdSense are driven in part out of this office.

“This site has set a new standard for what an engineering floor should look like. It is within informal environments that ideas come out.”

Either someone should tell Google’s London engineering staff that they’re not innovating or, like last year, they deserve a slap on the back for doing so. Either Google’s main money-maker, AdSense, is part-made in the U.K., or it isn’t. But Google can’t necessarily have it both ways.

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Of course, most startup entrepreneurs are nowhere near that wealthy, but that doesn’t mean they don’t want to be. After all, that’s what the big exit is supposed to bring. It’s a primary justification for all the risk that being a startup entails.

But it wasn’t that tax rate that stung the most: what really got the startups incensed was the proposed near-doubling of the tax rate for equity sales. Where an entrepreneur who achieves an exit currently has to pay up to 32 percent in various taxes on the benefits of that sale, the government was proposing jacking that rate up to around 60 percent.

Arguing that there would be little point in being an entrepreneur in France anymore – particularly with the UK offering a much better deal just across the Channel – the startups organized themselves into a largely online movement called ‘Les Pigeons’, or ‘the suckers’.

They were set for a street protest this weekend, but yesterday they met with finance minister Pierre Moscovici… and won.

As Liam Boogar of the Rude Baguette blog noted today, the contentious tax (just over half of which is a capital gains tax) will remain unchanged for entrepreneurs keeping their companies for five years or more, and “money gained from selling off your company that is reinvested into other startups will be almost entirely untaxed”.

And as the cover of today’s Libération newspaper noted, it’s now the government that has been made to look foolish.

“There’s a lot more work to be done by entrepreneurs, both in their startups and in France – but this week marked a change in perception of France – we are no longer a country that is anti-business, we are a strong socialist country that is just beginning to realize how essential small business is to our growth and existence as a global power,” Boogar wrote.

There’s the rub. Whether or not you agree with socialism – not a dirty word in Europe, remember – taxes should not remove all incentive for risk-taking. It seems the Pigeons have been successful in demonstrating this to Hollande’s government.

It’s quite refreshing to see European startups flexing their political muscle. Now if those in Germany can just do the same in their own fights against counterproductive freelancer taxes and crazy ancillary copyright proposals, we can call this a trend.

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The impetus for this idea (which would levy a fee of two British pounds (about $3.20 US) on every internet account to create a government investment fund), is abundantly obvious: print-advertising revenue, which most general-interest papers rely on for the bulk of their income, has fallen off a rather large cliff over the past several years, and the rate of decline seems to be accelerating rather than slowing. Paywalls may be picking up some of the slack for a few providers, but they are not enough to fill the gap completely — and so companies are cutting back, and in the case of U.S. papers even shutting down print.

Journalism and newspapers are no longer synonymous

Editors like Leigh — and columnists like Roy Greenslade of the Guardian, who wholeheartedly supports the idea of an internet tax to subsidize print papers — are understandably concerned about the effect that this unprecedented industry decline is likely to have on journalism, which they argue serves a crucial public purpose and therefore can’t be left to the whims of the marketplace. Others in the U.S., including New York Times media writer David Carr, have raised similar concerns about the effect on cities such as New Orleans when their newspaper shrinks in size or stops printing, and can (theoretically at least) no longer hold politicians and other evil-doers to account in the way they always have. As Leigh puts it:

“When the day comes that the newspapers are forced to stop printing altogether, it will be a disaster for democracy. The lean pickings from web advertising on a free newspaper site will only pay for a fraction of the high-quality investigative journalism that commercial newspapers generate.”

There are a whole series of problems with the internet-tax idea, many of which journalist Allan Donald has summarized in a smart and funny post (which, as Chris Dixon points out, imitates a popular geek response to early spam-fighting ideas). Among his points are that such a plan “tries to support a fundamentally broken business model” and “users of the web will not put up with it.” As Paul Carr notes at Pando Daily, the idea of compensating or financing newspapers based on their readership and market share could also worsen some of the existing problems with digital media, since all it would do is encourage papers to boost their traffic by whatever means possible.

But one of the biggest flaws with the tax idea, as Charlie Beckett at the LSE points out, is that it is based on the principle that journalism — of the kind that is deserving of government funding — is synonymous with newspapers. Even if that was the case in the distant past, it clearly isn’t any more: such a plan would leave out a growing number of alternative providers, from non-profit entities like the Bureau of Investigative Journalism to smaller web-only media outlets (some would argue that the Guardian is also a non-profit, but not by design). And these kinds of alternative services and startups, many of whom are trying to reinvent journalism for a digital age, are arguably more deserving of funding than the large newspapers who already have giant market share.

Taxing internet users would do little to “save” journalism

The reality is that the internet-tax plan would do very little to help subsidize journalism that is in the public interest. Instead, it would be used to subsidize a failing business model, one that continues to be based primarily around a dying medium called print. How would that benefit society as a whole? I think Carr is right when he says the industry needs to be more creative in finding a range of small ideas and solutions to their problems, not depending on a massive publicly-funded bailout.

Some of the proponents of the internet-tax idea argue that it makes sense for Britain to take such measures, since a similar structure — namely, a government-imposed TV tax — is used to subsidize the BBC. But whether you believe that a tax on the purchase of a specific consumer product is the appropriate way to do such a thing (which I would argue it is not), creating a single government media outlet for public-service purposes is a very different thing from setting up a fund that would be used to prop up an entire industry.

American newspaper owners like Advance Publications — which has shut down a print paper in Michigan and cut back on printing in a number of other cities — have been criticized for their failure to negotiate the transition from print to digital well, and there is no question that their handling of the move and their digital replacements leaves a lot to be desired. But at least they, and other struggling newspaper chains such as the Journal Register Co. (which recently filed for bankruptcy for the second time) are trying to find a way towards a new model, not asking for governments to subsidize the existing one.

Saving — or rather, enhancing and expanding — journalism is a noble and worthwhile goal, and finding innovative solutions for doing so is a commendable idea. But taxing internet users to prop up a largely print-based newspaper industry is not the same thing. Not even close.

Post and thumbnail images courtesy of Shutterstock/iQoncept and Flickr user Zarko Drincic

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Sen. Jim DeMint (R-S.C.) made the comments in the Wall Street Journal to oppose the Marketplace Fairness Act, a bill intended to curb the advantage that sellers like Amazon (whose large online sales led to the bill in the first place) and eBay have over traditional shops. Right now, the online retailers can sell cheaper because they don’t have to collect sales tax in states where they don’t have a physical presence.

The “fairness” argument appears logical and enjoys bipartisan support, but DeMint argues that it could lead to companies having to engage with thousands of state and municipal taxing authorities. He raises the example of a small business in South Carolina facing simultaneous audits from California, New Jersey and Hawaii:

The burden on Internet entrepreneurs could be staggering. There are already nearly 10,000 state, local and municipal tax jurisdictions to navigate nationwide.

DeMint’s arguments may be alarmist. The law, as it stands, would not apply to firms that sell less than $500,000 a year and lawmakers are also working to create a simplified method for sellers to collect tax across states. But DeMint also raises the interesting questions about how far internet-related taxes could be applied in the future: downloading taxes? a national online sales tax?

Despite opposition from DeMint and companies like Overstock, the law appears set to pass. Amazon itself, under pressure to pay from a growing number of states, endorsed the bill earlier this summer.

This means consumers who don’t live in New Hampshire, Oregon, Alaska, Montana or Delaware should get ready to pay more for online purchases.

(Image by Michael D Brown via Shutterstock)

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In many countries, printed books and other content artefacts enjoy reduced VAT rate exemptions for cultural reasons. But digital equivalents are mostly not exempted.

This year, France moved e-books outside the country’s standard 19.6 percent VAT bracket, putting them on a footing with physical books’ seven percent rate. Luxembourg also reduced e-book tax from its 15 percent countrywide rate to just three percent.

But the European Commission has now begun investigating the countries for potentially breaching “infringing EU law”, saying:

“This situation is creating serious distortions of competition that are damaging to economic operators in the other 25 Member States since digital books can easily be purchased in a State other than the one where the consumer resides…

“Local actors in the electronic book market have complained that some of the dominant players in this market have reorganised their distribution channels to benefit from these reduced rates, which has apparently had a serious effect on the sale of books (both digital and traditional) in the other Member States in the first quarter of 2012.”

The EC’s technocratic action creates a rare anomaly in which it appears to be acting against consumers’ wish to buy books as cheaply as possibly across borders – something EC digital agenda commissioner Neelie Kroes’ agenda has specifically set out to achieve in her aim to create a single European digital content market.

And it is an issue that is more widespread than just books. Digital newspapers, for example, typically do not benefit from the special VAT reductions applied to their printed forebears, putting them at a price disadvantage with old-line products.

The EU allowed member states to reduce book VAT in 2006. This week, however, the EC said: “Downloading of digital books … is not included in this list and cannot therefore be taxed at the reduced rate.” In truth, the EU’s 2006 mandate did not specifically disallow digital book reductions, and was absent of any distinction between physical and digital at all. No wonder individual countries are deciding, for themselves, “a book is a book”, regardless of medium.

This kerfuffle may be short-term. The European Commission says it will put forward proposals by the end of 2013 for making printed and digital book rates equivalent. For now, however, individual countries that act sooner may be deemed lawbreakers.

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Local reports suggest the French authorities are investigating the software giant over claims that it has committed fraud, by secretly routing money through offshore companies to avoid corporate tax — a move which could violate the country’s laws.

French magazine Le Canard Enchaîné made the claims after Microsoft’s French headquarters were subjected to a tax raid last week.

The magazine claims that the authorities are examining whether for the past four years Microsoft has operated “a business aimed at French customers, for the French market, using the human and material resources of Microsoft France and located in France… without paying corresponding taxes.”

Corporate tax in France is currently 33 percent, but many companies — such as Amazon and Google use complicated European tax avoidance schemes to route money earned around the continent to more pleasing tax regimes, such as Ireland (where corporation tax is 12.5 percent.)

Avoidance — using loopholes in the law to minimize taxes — is legal if done properly. Evasion — the mis-statement of accounts in order to reduce tax burdens — is not. The French government have spent the last few years trying to crack down on tax cheats and championing the end of tax havens.

It’s already been a tough time for Microsoft France, which is looking to make its first ever round of redundancies after admitting that it could not overthrow Google’s dominance in online advertising.

A local spokesman for the company did not respond to a request for comment.

Photograph copyright jbor / Shutterstock.com

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Ireland has lots of virtues, but a history of innovation isn’t one of them. In fact, it has one of the poorest innovation records in the world as reflected by statistics like its proportionate share of worldwide patents. Its recent success in attracting the darlings of Silicon Valley has nothing to do with “dynamic digital media” and everything to do with the less-glamorous world of corporate accounting.

Ireland has been aggressive at luring foreign multinationals with its tax policies. These include special provisions for intellectual property royalties as well as Europe’s lowest corporate tax rate — just 12.5 percent compared to 34 percent in France and Belgium

The Irish tax system is especially appealing to companies like Twitter whose sales do not come from physical goods. Twitter likely intends to copy Google (NSDQ: GOOG) and other companies that employ strategies like the “Double Irish” and “The Dutch Sandwich” to reduce their overseas tax bill. The technique, first reported by Bloomberg, involves creating an Irish subsidiary to control foreign licensing revenue. The subsidiary in turn pays large fees to a “management” unit in Bermuda by way of a Dutch flow-through company. The scheme, combined with Ireland’s already low corporate tax rate, allowed Google to report pre-tax profits of less than 1 percent of sales in 2008.

There seems to be no reason why Twitter couldn’t establish a similar model which, for now, is legal under tax law. Twitter’s Dublin office could, say, pay an offshore entity to “manage” the overseas revenue stream it collects from sponsored tweets.

In response to an email from paidContent, a spokesperson for the company declined to elaborate on the reasons for the decision and instead provided the following statement: “The Twitter office in Dublin, our third location outside of the U.S., is a great next step in the company’s global expansion.” In addition to its home office in San Francisco, Twitter also has an office in London which it is staffing with sales and marketing personnel. The role of the London office is perhaps another sign that the Dublin office will be focusing more on tax than tweeting.

If the Dublin move is indeed about tax law, the Ireland business agency’s early morning tweet that “Ireland is trending” is perhaps a bit overstated. But even the arrival of a passel of accountants will no doubt be welcome in recession-racked Ireland.

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Stone, of course, is no longer at the company, and it seems the vision he outlined is long gone, too. Boosted by hundreds of millions of dollars in funding, and 100 million active users, the company has been on a relentless expansion plan recently, including starting operations in Britain and Japan.

Monday, Twitter announced it was going further, by opening another office in Ireland. The news was confirmed with a brief statement pointing out that Dublin would be “our third location outside of the U.S.” and was “a great next step in the company’s global expansion.” It’s said to be the heart of the company’s forthcoming internationalization efforts.

So why Ireland?

There is quite a lot of talent in and around Dublin, across important areas such as software development and sales and logistics, but the real reason that Twitter’s gone to Ireland is simple: money.

One of the quirks of European integration is that different countries have different corporation tax rates, and businesses can set themselves up in one country and channel revenue there from others. Ireland has a 12.5-percent corporation tax rate, as well as laws that allow large businesses to easily shuffle money off to tax havens where the situation is even better. This makes it very attractive as the place for non-European businesses to set up their European headquarters — even if it’s not always popular with the rest of the continent.

Google, for example, has received intense criticism for using Ireland as a sort of tax haven: a situation that means it has paid just $12 million in corporation taxes in the U.K. despite having multi-billion dollar revenues.

The topic was addressed recently by Eric Schmidt, who said that of course he’d love Google to pay more tax, but tax laws are too weak, which means the company is obliged to exploit them. That’s creating shareholder value for you.

But while I’m sure Ireland — which is one of Europe’s most troubled economies — is largely happy to see any jobs arrive on its shores, not everyone thinks that tempting in foreign businesses with low taxes is the way to make the Irish economy sustainable in the long term.

Over on Google+, Dermot Daly, the founder of Dublin-based mobile app developer Tapadoo, asks whether it’s good enough to simply be part of the support layer for multinationals:

I used to think that when U.S. companies chose Ireland as their European HQ, this was a great thing. High quality jobs, large employment etc. Then I worked in one. Doesn’t matter which one. Here’s what I did see; there were a lot of high paid jobs in it, however the vast majority of them were not working on what one may call “core.”

In fact most of the Irish operation were involved in localization, or employed in the company’s support organization. Not direct support, but support all the same… the attitude was if it was important, it should be done in the U.S.

This tension between jobs that are a core part of a company’s innovation and jobs that are merely part of the sales machine is something I’ve highlighted before. In fact, when Twitter first started building out its London office, I asked whether it wanted to genuinely be part of the local culture — hiring developers, making products — or whether it simply saw Europe as a rich sales and marketing opportunity.

I think the evidence is pointing towards the latter. The U.K. Twitter blog has recently featured details of its first localized advertising, its links with London Fashion Week and marketing use by Burberry.

At the same time, the question of whether Ireland is best-served by low corporation taxes continues to rage. After all, its aggressively low corporation tax helped build the economic growth known as the Celtic Tiger — but did little to stop its precipitous descent during the financial crisis. (There’s a great piece by Michael Lewis if you want an overview of what happened).

Faced with all of this, there seems to be a single question. If the brightest technology companies are making their decisions based around tax havens, rather than talent hotspots, then how can Europe’s startup scene go about creating good jobs for itself?

London’s Songkick thinks it may have the answer, with a program it calls the “Silicon Milkroundabout.” The company — which we recently listed as one to watch in the GigaOM Euro 20 — is championing events that help university graduates, many of whom are tempted by jobs in finance or big technology firms, realize that jobs in startups are a viable option.

In particular, it’s intended as a challenge to the practice of big businesses touring around universities and trying to hook graduates, which is known as the “milk round.” Songkick CEO Ian Hogarth is encouraging startups and younger technology companies to work harder to appeal to graduates, to help them understand that there’s more to life than safe corporate work.

“We, along with many of our friends from other startups, struggle with the shortage of computer science graduates and experienced software developers.  The fact is that many potential candidates aren’t even aware of tech startups as an alternative to the more traditional routes of working for a bank, a consultancy, Google, Facebook or Microsoft… Growth in the start-up sector is leading to the creation of new jobs, and by working for a start-up you can directly make a greater contribution.”

The group — including companies we’ve written about before such as Artfinder, Adzuna and Last.fm — has set up a jobs fair next month with 500 posts up for grabs.

Five hundred jobs may not seem like much in the great scheme of things, but these are jobs that pay back straight into the local economy, so perhaps it’s a start.

Twitter photograph used under Creative Commons license courtesy of Flickr user ghoseb

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If you’re living with a bit of anxiety that your tax naughtiness might be uncovered and cost you, now is a good time to do something about it. The IRS is offering an amnesty. Inform them of your assets before Aug. 31 and you’ll pay a lower penalty fee of 12.5 percent for up to $75,000 or 25 percent if you’ve got more than that (on the odd chance you inherited a foreign account and never withdrew anything, the penalty will be only five percent).

If you’re discovered outside the amnesty program, the penalties “are draconian,” warns Harry Miller, a partner at Burns & Levinson, and expert on international tax issues. “If the failure to disclose is determined to be willful, then the civil penalty for each violation is up to the greater of $100,000 or 50 percent of the value of the undisclosed account. Accounts can be decimated.”

Who should consider taking advantage of the program? Miller recommends that “any U.S. citizen or U.S. resident with investments or accounts outside of the U.S. who has failed to disclose these accounts on annual information returns required by the U.S. government, or who has failed to include the income from such accounts on their personal U.S. income tax return, should consider taking advantage” of the amnesty program. But he notes it’s not for everybody:

There are significant tax costs involved with coming clean. In most cases the cost to be paid will be very low in comparison with the potential costs of being discovered without having participated in the program.  But anybody interested in this program needs to know what the potential tax cost and reduced penalties will be before getting into it.

For those who have so far avoided detection and are considering risking it for a while longer, Miller warns that a combination of terrorism-related scrutiny of international accounts and a recession-related drive to increase revenue without increasing tax rates will make the government more likely to discover you going forward. The IRS “has hired hundreds of new agents in Europe and Asia specifically in order to beef up their compliance enforcement efforts,” says Miller, who warns the risk is greatest in those countries with tax treaties with the U.S.

And while this amnesty is a repeat of a successful 2009 program, which convinced 15,000 tax dodgers to turn themselves in, “it is unlikely that there will be another similar program, and certainly nobody should count on such a program,” says Miller.

So what do you do if you’re thinking of taking advantage of the amnesty? Your regular accountant may not be able to handle the matter, as this is a highly specialized area of tax law, so find someone experienced with the 2011 Offshore Voluntary Disclosure Initiative. And do it quickly. Paperwork must be filed and penalties paid by the end of August.

Image courtesy Flickr user Podknox

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